The game explicitly states that they live in a ghetto and shows you many examples of them experiencing racist persecution. There's several quests and lines of dialogue that touches on this within the game, not to mention the other clear signs of racist bs we see the Nord's exhibiting (the reachmen and the khajit being treated as they are).
It's very clear that this is what they intended to convey.

The fact that the game engine is limited to showing Extreme small cities and that the resources they had available at the time made it so they just copy-pasted houses for the dunmer rather than making a bespoke level design isn't evidence of the dunmer "actually being treated better" but instead just an example of how limitations of technology and production will at times interfere with the story one is trying to tell.